Why Not 401(k)s for Public Employees?

Introduction

Gavin Potenza

Public employees in Wisconsin and other states are being asked to contribute more toward their pensions. But in some states, there are efforts to shift new government employees out of the traditional pension plans to 401(k)-style investments.

Many government officials are embracing the idea because it shifts the risk from the employer (or taxpayer) to the worker. The private sector has all but abandoned traditional pensions, which are defined benefit plans, to 401(k)s, which are defined contribution plans. Surveys have shown that many workers in 401(k)s have not saved enough for retirement. According to research cited in a recent Wall Street Journal article, for example, "the median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement."

What would be the consequences of a shift to 401(k) plans for public employees? What have we learned from the private sector's experience? What has worked and what hasn't?